Willing to Evade An Experimental Study of Italy and Denmark

Tax evasion varies widely across countries and follows a geographical pattern: Southern European countries such as Italy, Spain and Greece, are plagued by higher evasion rates than Northern European countries. This suggests a testable research question: Can national identity explain North-South discrepancies in European tax compliance? We address this issue by conducting identical laboratory experiments in Denmark and Italy, two countries that lie not only at the opposite ends of the spectrum on tax compliance but also at the extremes of cultural differences and citizen trust in the government. We adopt a double-hurdle model to separate the decision of whether to evade or not (extensive margin), from the decision of how much to evade (intensive margin). This study innovates both theoretically and methodologically. Theoretically, it contributes in two ways to the literature on tax compliance: 1) by showing that taxpayers’ attitudes toward evasion are not predictive of behavior; and 2) by showing that tax compliance is not related to trust in government or one’s fellow citizens. Methodologically, the paper innovates by being the first to examine tax compliance in Denmark, and by testing the effects of an extended vector of covariates on both the intensive and extensive margins of tax behavior. Empirically, we find that--contrary to expectations-Danes are more likely to evade tax than Italians; at the same time, Danes are less tolerant of tax evasion by others. We find that individual evasion choices are strongly affected by risk aversion and individual perception about others' compliance behavior. We conclude by discussing the implications of our findings for tax policies and future research.